3. The money supply
in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400
billion. The central bank of Freedonia has instituted a policy of zero
inflation. Assuming that velocity is stable, if real GDP grows by 10 percent
this year, how will the central bank of Freedonia change the money supply this
year?

a. It will not change the money
supply at all.

b. It will reduce the money supply
by 10 percent.

c. It will increase the money
supply by 10 percent.

d. It will increase the money supply
by 2.5 percent.

ANSWER: c. It
will increase the money supply by 10 percent.

4. Angela reads
financial advice columns and concludes the following. Which, if any, of her
conclusions are incorrect?

a. Higher
average returns come at the price of higher risk.

b. People who
are risk averse should never hold stock.

c.
Diversification cannot eliminate all of the risk in stock portfolio.

d. None of
her conclusions are incorrect.

ANSWER: b. People
who are risk averse should never hold stock.

5. If the reserve
ratio is 10 percent, $1,000 of excess reserves can create

a. $100 of new money.

b. $1,000 of new money.

c. $10,000 of new money.

d. None of the above are correct.

ANSWER: c. $10,000 of new money.

6. Use the figure below
for the next two questions.

Which of the
graphs in the figure above shows the effects of an increase in the tax rate on
saving?

a. graph 1

b. graph 2

c. graph 3

d. None of
the above are correct.

ANSWER: a. graph
1

7. Which of the
following is correct?

a. All economists believe that
unions are bad for the economy as a whole.

a. the nominal interest rate adjusts
one for one with the inflation rate.

b. the growth rate of the money
supply determines the inflation rate.

c. real variables are heavily
influenced by the monetary system.

d. All of the above are correct.

ANSWER: a. the nominal interest rate adjusts
one for one with the inflation rate.

9. Fred puts $150
into an account when the interest rate is 4 percent. Later he checks his balance
and finds he has about $168.73. How long did Fred wait to check his balance?

a. 3 years

b. 3.5 years

c. 4 years

d. 4.5 years

ANSWER: a. 3
years

10. Which list ranks
assets from most to least liquid?

a. currency, fine art, stocks

b. currency, stocks, fine art

c. fine art, currency, stocks

d. fine art, stocks, currency

ANSWER: b. currency, stocks, fine art

11. Suppose that in a
closed economy GDP is equal to 10,000, Taxes are equal to 1,500, Consumption
equals 6,500, and Government expenditures equal 2,000. What is national saving?

a. –500

b. 0

c. 1500

d. None of
the above are correct.

ANSWER: c. 1500

12. The BLS recently
reported that there were 48.6 million people over age 25 who had at least a
bachelor’s degree. Of this number, 38.0 million were in the labor force and 36.9
million were employed. What was the labor-force participation rate and the
unemployment rate for this group?

a. about 97
percent and about 2.9 percent

b. about 97
percent and about 2.3 percent

c. about 78
percent and about 2.9 percent

d. about 78
percent and about 2.3 percent

ANSWER: c. about
78 percent and about 2.9 percent

13. When the money
market is drawn with the value of money on the vertical axis, the price level
increases if

a. either money demand or money
supply shifts right.

b. either money demand or money
supply shifts left.

c. money demand shifts right or
money supply shifts left.

d. money demand shifts left or money
supply shifts right.

ANSWER: d. money demand shifts left or money
supply shifts right.

14. A risk-averse
person

a. would
necessarily not play a game where she had a 50 percent chance of winning $1 and
a 50 percent chance of losing $1.

b. would
necessarily not play a game where she had a 75 percent chance of winning $1 and
a 25 percent chance of losing $1.

c. both of
the above are correct.

d. Neither of
the above are correct.

ANSWER: a. would
necessarily not play a game where she had a 50 percent chance of winning $1 and
a 50 percent chance of losing $1.

15. Suppose that the
reserve ratio is 5 percent and that a bank has $1,000 in deposits. Its required
reserves are

17. Ross thinks that
if Acme Corporation has high revenues, then Zenith Corporation will have low
revenues, and that if Acme Corporation has low revenues, Zenith Corporation will
have high revenues. He buys stock in both corporations.

a. He has
reduced idiosyncratic risk but not aggregate risk.

b. He has
reduced aggregate risk, but not idiosyncratic risk.

c. He had
reduce both idiosyncratic risk and aggregate risk.

d. He has
reduced neither idiosyncratic risk nor aggregate risk.

ANSWER: a. He has
reduced idiosyncratic risk but not aggregate risk.

18. Suppose a bank
has $200,000 in deposits and $190,000 in loans. It has a reserve ratio of

a. 5 percent

b. 9.5
percent

c. 10 percent

d. None of
the above is correct.

ANSWER: a. 5
percent

19. An increase in
the budget deficit

a. changes
the supply of loanable funds.

b. changes
the demand for loanable funds.

c. changes
both the supply of and demand for loanable funds.

d. does not
influence the supply of or the demand for loanable funds.

ANSWER: a.
changes the supply of loanable funds.

20. Which of the
following causes of unemployment is not associated with an excess supply of
labor?

a.
minimum-wage laws

b. unions

c. job
search

d. efficiency
wages

ANSWER: c. job
search

21. The cost of
changing price tags and price listings is known as

a. inflation-induced tax
distortions.

b. relative-price variability costs.

c. shoeleather costs.

d. menu costs.

ANSWER: d. menu costs.

22. Your accountant
tells you that if you can continue to earn the current interest rate on your
balance of $500 for ten years, you will have about $983.58. What rate of
interest does your accountant expect you to earn?

27. Kelly deposited
$1,000 into an account three years ago. The first two years she earned 5 percent
interest, the third she earned 6 percent. How much money does she have in her
account today?

a. $1,157.90

b. $1,168.65

c. $1,176.00

d. None of
the above are correct to the nearest penny.

ANSWER: b.
$1,168.65

28. In a
100-percent-reserve banking system,

a. banks can create money by issuing
currency.

b. banks can create money by lending
out reserves.

c. the Fed can increase the money
supply with open market sales.

d. banks hold as many reserves as
they hold deposits.

ANSWER: d. banks hold as many reserves as
they hold deposits.

29. The country of
Nemedia does not trade with any other country. Its GDP is $20 billion. Its
government collects $4 billion in taxes and pays out $3 billion to households in
the form of transfer payments. Consumption equals $15 billion and investment
equals $2 billion. What is public saving in Nemedia, and what is the value of
the goods and services purchased by the government of Nemedia?

a. –$2
billion and $3 billion

b. $1 billion
and $3 billion

c. –$1
billion and $4 billion

d. There is
not enough information to answer the question.

ANSWER: a. –$2
billion and $3 billion

30. If the minimum
wage was currently above the equilibrium wage, than a decrease in the minimum
wage would

a. increase both the quantity
demanded and the quantity supplied of labor.

b. decrease both the quantity
demanded and the quantity supplied of labor.

c. increase the quantity of labor
demanded and decrease the quantity supplied.

d. decrease the quantity of labor
demanded and increase the quantity supplied.

ANSWER: c. increase the quantity of labor
demanded and decrease the quantity supplied.